Australia’s asset management industry is undergoing a wave of generational change. Veterans such as Anton Tagliaferro, Hamish Douglass, John Sevior, and Kate Howitt are stepping back, making way for the next generation of talent.
Generational change provides an opportunity for the industry to evolve, if not reform. Australia’s asset managers can better practices to improve returns, increase alignment, and ultimately garner greater trust with clients. This article highlights 8 key factors that can elevate the Australian funds management industry to a position of global best practice.
1. Alignment and Personal Trading
Fund management companies should align their interests with those of their clients.
However, personal trading by fund managers is all too common. This practice a distraction that costs time and mental energy, often resulting in diminished returns for investors. It creates misalignment.
It is simple, personal trading should be eliminated. This is the only way to ensure that the practice does not negatively impact investor returns.
While some firms do ban personal trading, unfortunately, there are just as many that don’t.
2. Ownership Structures
The ownership structure of a funds management company impacts accountability and performance.
Quality ownership structures, such as employee ownership or partnerships, should be commonplace as they align the interests of personnel with the long-term success of the company.
Conversely, concentrated ownership structures or those lacking the diversity of thought that a board provides, should be treated with caution by investors.
3. Governance Quality
Strong governance is essential for maintaining integrity within funds management. Managers should install governance frameworks to oversee decision-making processes, risk management, and compliance with regulatory requirements.
Yet unfortunately, the breadth and quality of governance in Australia is sporadic at best.
Fund managers must do better by establishing independent boards, investment and compliance officers, and regular third-party reviews.
These practices should be common, but today unfortunately they are not.
4. Risk Controls
Effective risk controls are vital to the management of investment portfolios.
Fund managers should implement comprehensive frameworks that identify, analyse, and mitigate potential downside risks. These controls should encompass financial, market, liquidity, client, operational, safety, regulatory, corporate, personal, IT, legal, compliance, and ESG risks.
While this list is long and extensive, the elements are critical to ensure that appropriate practices are in place to manage people’s wealth or often life savings.
These controls are costly, and thus they are sadly often overlooked.
5. Fund Size and Capacity
Performance is directly correlated to the amount of capital invested. As more capital is invested into a strategy or fund, diminished returns occur.
Conflict arises as fund managers become wedded to management fees derived from investing ever greater amounts of capital. For example, ASX Small Cap managers trying to invest over $2 billion in smaller companies (Ex-100) benefit from large management fees but often harm underlying returns.
Fund managers should proactively monitor capacity levels and implement closed-end structures or capacity caps to preserve investment performance.
Portfolio capacity constraints should be closely assessed by all investors.
6. Information Flow
There is a misconception in Australia that large investment teams deliver improved performance.
However, when teams expand negative outcomes often occur as information flow degrades, decision-making slows, conflicts arise, and inefficiency augments.
Smaller investment teams should outperform their counterparts due to clearer communication, faster decision-making, enhanced accountability, and the ability to adapt to market changes rapidly.
If small, highly experienced teams are coupled with quality governance and appropriate risk controls, performance should greatly improve.
7. Transparency
Transparency is key to building long-term trust with investors. It allows informed decision making and fosters stronger relationships between fund managers and their clients.
Fund managers should provide clear and comprehensive disclosure of investment strategies, fees, processes, and risks to their clients. Information flow should be continuous, and two-way.
Australia’s investment managers need to move away from limited disclosure of errors, and pullback the curtain of process and performance that is often held tightly shut.
8. Key Person Risk
‘Star stock pickers’, dominant portfolio managers, and controlling chief investment officers, each represent meaningful risk to investment companies and investors. Negative performance often occurs when key individuals misstep, become distracted, or leave an organisation.
To mitigate risk, fund management companies must remove single point decision making and implement shared responsibility, succession planning, and staff development programs.
The reigns of control must be put aside to preference performance over ego.
Conclusion
Australia’s funds management industry must evolve to elevate current practices, improve investor trust, and deliver quality risk adjusted returns.
A focus on alignment, ownership structures, governance quality, risk controls, fund size and capacity, information flow, transparency, and key person risk, would each be a great place to start.
Australian investment managers to prioritize investor interests.
It is time for change.
